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I'm a bit uneducated on this so forgive my basic questions.
I'm in Houston. My mother has about $45k left to pay on her mortgage. The house is probably worth $200k. Her current rate is 6.5%. She can't qualify for a lower rate because she's on a fixed income and retired.
We were thinking about having her sell her home to my brother or me for the balance because
we can qualify for a much better rate.
My brother just sold his home so he's renting with no mortgage.
I own my own home (with a mortgage) and have an 800 FICO score as well as a good job.
My questions: are banks typically willing to give a mortgage for under $50k? What are the pros and cons?
Under $50k is going to be difficult, especially in Texas, where the rules of Total Fees vs. Loan amount are tight. Many Title fees are Fixed and not related to the loan amount (they don't reduce with a smaller loan or price), hence you get Rules Violations.
Also, regardless of the appraised value, the purchase price drives the transaction, so you can't really do a $45k loan with a $45k price, as there are no 100% loans for second homes. (VA/USDA allow for this, but only on a Primary Residence.)
You want to set the selling price such that she can 1) "pay" all closing costs, and 2) provide a Gift of Equity such that the resultant loan is 80% or less than the selling price, thus facilitating the avoidance of Mortgage Insurance.
So: her lender needs to net $45k, there will be probably $7500+ in closing costs, as you will need to pay a full year of property taxes and homeowners insurance, along with lender and title fees, and you need a 20% equity cushion after that stuff is paid.
$45,000 + $7,500 = $52,500 paid to her lender and third parties. So, $52,500 = 80% of X.
$66,000 x .8 = $52,800. Close enough.
Set the price at $66,000. She gifts 20% of that using this:
Now, where do we find a lender who wants to play small-ball? I know I wouldn't want to. There's so little revenue in that loan, it wouldn't cover staffing comp required to process it, and it would essentially be a House Loan. Do you have a friend in the business?
OR: (Going off the page here) Is she open to selling at $100k, gifting $20k of equity, net loan $80k, she profits $28k, and you all [REDACTED] that cash as you see fit?
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JK's Reverse option is an excellent one. I used 1939 as a birth year for Mom: Lump sum to her ranges from $24k to $75K. Really too many options to get into. She can get monthly cash to her (instead of lump sum) at about $430 - 530 per month. Need more data to verify, heavily ballparking. But a cleaner option.
Lenders typically add a "rate premium" to loans under $100k because it is harder for them to remarket these in the secondary market. That rate premium, even if it is only 1/2 % is kind of high given the very low rates currently available, though given the terrible rate that mom has had this should still be a BIG savings...
You may run into another "rate premium" or other surcharges due to the fact that this is not an "arm's length" sale, but this is something that really depends on the underwriting procedures of lenders and may be something that lenders that understand the situation (of mom being retired / on fixed income) and appreciate your good credit score will waive when seller is not "distressed", it is much more of a concern when the seller is behind on their payments or facing foreclosure...
Check to see if your Mom would qualify for a home equity loan from your local credit union. I know that when I was self employed and only had $35K left on my mortgage I did not qualify for a refinance, but, my local credit union was willing to do a home equity loan so I could pay off the balance of the mortgage. (And the cost to do so was far less than refinancing.)
What if we were to just pay off the balance of 45k? What are the tax implications?
If your Mom has just social security income she probably is taking the standard deduction and does not itemize - so there probably would be no tax benefit lost if she decided to pay off the mortgage.
Check her tax filing for last year to see if she simply takes a standard deduction or if she makes out better itemizing her deductions. With only $45K left on the mortgage she probably paying mostly principal and very little mortgage interest.
Where is your mother going to live after you "buy" the property from her? (Which may not be a good idea tax-wise, assuming that she may intend to leave the property to you.) Instead, check into a Home Equity loan. If need be, since you're not concerned about mixing family and money, simply co-sign on the loan.
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